The National Stock Exchange of India Ltd (NSE) has settled its Trading Access Point (TAP) Architecture and Network Connectivity case by paying a penalty of ₹643 crore [₹6,43,05,30,000] to Securities & Exchange Board of India (SEBI) that was probing an alleged deficiency on the part of the exchange and its top officials to deal with a situation wherein some high-frequency stock traders were found to be gaming the system. 

“In view of the acceptance of the settlement terms by panel of Whole Time Members (WTMs) and receipt of settlement amount and undertakings by SEBI the proceedings initiated against the applicants vide the Show Cause Notice dated February 28, 2023 are hereby disposed of, as per approved settlement,” SEBI said in an order. 

NSE, on behalf of itself and other applicants , had remitted the settlement amount on September 25,2024, the order said. 

The applicants for the settlement include NSE, its former MD & CEO Vikram Limaye and other top officials Umesh Jain, GM Shenoy, Narayan Neelakanthan, VR Narasimhan, Kamala K, Nilesh Tinakar, R Nandkumar and Mayur Sindhwad. 

Apart from the financial penalty all applicants other than NSE and GM Shenoy will undertake pro bono community service of at least 14 days during the current financial year. 

TAP was a software application deployed by NSE in 2008 on the servers of Trading Members (TM) for managing connections and messages (orders/trades) of such TMs so that the exchange can estimate and levy transaction fee for the trades.

The TMs, registered with NSE, were connected to TAP to establish communication with the NSE trading system. 

While NSE introduced ‘Trimme TAP’ in December 2013 and ‘Direct Connect’ in February 2016 as an alternative to TAP, it continued with TAP till September 2019 in Equity segment and till November 2020 in Securities Lending and Borrowing segment.

Some high frequency stock traders were found to be misusing the TAP platform in 2013 to discretely execute order and benefit at the cost of other TMs.

In 2017 Income Tax authorities while investigating the co-location case of NSE which was recently closed by the SEBI due to lack of evidence, detected the TAP platform manipulation matter and a probe was initiated.

SEBI had conducted an examination with respect to the TAP architecture to ascertain the possibility of bypassing of TAP by TMs, the manner in which a complaint dated November 20, 2023 was dealt with by NSE and whether there has been lapses on the part of the NSE and whether such lapse led to any violation of security laws. 

SEBI found out that NSE did not take remedial measures to prevent / discourage any possible bypass of TAP.

The complaint dated November 20, 2013 and the deficiencies of the TAP system were not brought to the notice of NSE’s Standing Committee on Technology even after coming into effect of SEBI Circular dated July 06, 2015 on ‘Cyber Security and Cyber Resilience Framework of Stock Exchanges, Clearing Corporations and Depositories’.

Also there was alleged delay in appointment of Chief Information Security Officer by NSE, non-implementation of encryption feature.

The penalty was calculated based on  revenue generated and profits made through TAP subscriptions. 

The settlement comes as the NSE gears up for its IPO.